March 29, 2008

Chronicle of a Devaluation Foretold

Quico says: So, as I mentioned, in the middle-class-to-escualidón circles I tend to frequent in Caracas, Cadivi has become a constant, ever-present worry, a universal obsession. Everyone you meet seems to be at some point along the process of getting Cadivi dollars, everyone you meet has a Cadivi story to tell.

Which, really, shouldn't surprise us. People get excited enough about a bargain when they’re shopping for clothes, or when they find an airline tickets at below-the-going-rate… but money? Money sold for less than it's worth?! That’s something else! The notion itself is counterintuitive, perilously close to the definition of "too good to be true".

But it is true. The Chávez government really is hawking dollar bills for 40 cents a pop. Can you really call it a surprise that a bit of a frenzy ensues?

And so Cadivi has become a conversation set piece, the petrostate's answer to the weather. Everybody has something to say about the weather, right?

In particular, the weirdly dysfunctional Cadivi website has become an object of collective obsession. The site - which you must use to file a currency application - works sporadically, erratically, shuts down completely for hours on end, and generally seems designed by an unreconstructed sadist.

How to beat it? Is it better to log on late or early? From a PC or a Mac? Firefox or Explorer? What, pray tell, is the secret!??

In fact, the secret isn’t hard to fathom. The government needs a rationing mechanism for dollars. Cadivi itself is supposed to be a formal rationing mechanism, but the demand for subsidized dollars is so overwhelming that a secondary, informal rationing mechanism has become a must. After all, if the state approved the $5,000 traveller's allowance people are technically "entitled to get" for the ten million Venezuelans who probably want it, the entirety of the nation's $50 billion in oil income would go up in smoke right there, before they've even paid for any imports.

The principle behind all this is pretty straightforward, though it systematically eludes the government's economic policy makers: When you price a good – any good – at below it’s market value, it’s going to run out.

If the going price for apples is $1 and you start selling apples for forty cents, you’re going to run out of apples. Why? Because people will soon realize that they can buy apples from you for forty cents and turn right around and resell them for a dollar, pocketing the difference. So you will run out. It's a mathematical certainty. How big an orchard you have or how loaded the trees look is neither here nor there.

For the exact same reason, if the going rate for a dollar bill is one dollar and you start selling dollar bills for forty cents, you’re going to run out. It's a certainty. That, in for-dummies form, is what Cadivimania comes down to.

Of course, people say, “well, with oil at $110 a barrel and $32 billion in reserves, what’s the problem?” But that’s just fundamentally flawed reasoning. No level of reserves, no level of income is "high enough” when you’re selling dollars off at less than half their value.

Problem is, the government can’t let dollars run out, or even appear to be running out. Again, for an economist, what comes next is simple: they either have to either raise the price of dollars (devaluation) or they’re going to have to ration them…whether it’s through a ration book, long lines outside banks, a dollar lotery, or Cadivi’s peculiar, 21st Century contribution to the fine art of rationing price controlled goods: the Kafka-inspired website.

The experience of using Cadivi’s website pretty much defies description. It appears purpose engineered to magnify your frustration. The system spends far more time down than up, and in the highly unusual case that you do manage to log on, will reject your application for the most inanely arcane reasons you can imagine. One night, I wasted three hours because Cadivi could not fathom that the name of my educational institute had a non-Alpha Numeric character in it (the humble dash.) And that after I had, miraculously, managed to log on to the system after "just" 45 minutes.

And so a generation of middle and upper class Venezuelans are spending the best days of their lives mindlessly hitting “refresh” on their browsers for hours and hours on end to try to get into Cadivi’s website. Social events get planned around Cadivi’s curious, día de parada style restrictions on when you can and can’t log on. (“Dinner Wednesday night…mmmm, well, that’s my Cadivi night… could we do it Thursday instead?”) Entire evenings are wasted. It’s futile. It’s maddening. It’s obsession forming.

This idiotically inefficient rationing mechanism has given rise to a bizarre twist on what was already a real anomaly. It was already weird that the revolutionary people’s socialist government was handing out wads and wads of free money to the (relatively) privileged through Cadivi, but thanks to the website, we class enemies are now taking that money with a sense of grievance!

“Pssshh! The nerve! Ransacking the national treasury should not be this aggravating!”

It’s easy to sneer but, if I’m going to be honest, I have to admit that more than once, during those long hours of hitting "refresh," that’s exactly how I felt.

Of course, this direct use of their website to get dollars is just the visible tip of the Cadivi iceberg…the much more relevant portion is below the surface, in the tens of billions of dollars worth of subsidized imports coming into the country now, making huge profits for importers, underselling local producers that can't compete with half-off dollars, wreaking havoc with the country’s industrial structure and subsidizing the lifestyles of, for the most part, the rankest of the rank oligarchs.

In the grand scheme of things, the rationing-via-404-error-screen thing is a relatively minor warning sign that Cadivi can’t keep up with the demand it has created for subsidized dollars. A more ominous sign is the long delays many importers are facing in getting their dollars. One prominent multinational that sells equipment to PDVSA is getting its dollars six months late; stories of three and four month delays are common.

In effect, Cadivi is taking forced-loan after forced-loan from importers, and speculation is rife about just how big the accumulated backlog of requests has gotten. Cadivi sources admit, off the record, a $12 billion backlog. The independent estimates I’ve heard range between $16 and $20. Which is pretty alarming, considering the operative reserves at the Central Bank (i.e. excluding the gold) amount to just $25 billion: pay off the backlog, and the grim reality of a highly precarious reserve situation would be plain for all to see.

“The reserves are a mirage,” is how one well connected friend put it, “if Cadivi isn’t executing its backlog it’s precisely to preserve the illusion.”

Where this is all headed is painfully obvious, and has been since the second the words “exchange controls” were first uttered: devaluation. Everybody knows this, and that knowledge fuels the antsy sense of urgency that hangs around East-side Cadivi-mania. And yet, for reasons that make exactly zero sense to me, the government keeps putting it off.

As one unconfirmed, unconfirmable, quite possibly false but nevertheless suggestive rumor would have it, the reason is simple. As the story goes, soon after taking on his post as Finance Minister, Rafael Isea sat down with President Chávez and showed him a carefully worked out power point presentation demonstrating beyond any reasonable doubt that devaluation was now inevitable and doing it sooner would be less traumatic than doing it later. Chávez, the rumor has it, listened carefully, thanked his minister warmly, and sentenced, “that’s all very good Isea, but you can just forget about it: No devaluation!”

Isea, shocked, tried to plead, “but, comandante…” only to get cut off “my decision is final.” End of conversation.

Such are the ways of policing making in the Chávez era.

And so, Isea is left to think up yet another new batch of tricks, accounting gimmicks, and ley-de-salvaguardia defying stunts to keep this whole Rube Goldberg Machine of a fiscal and monetary policy sputtering on for another few months. So far, they've tried:
  • Stretching out Cadivi’s payments over longer and longer periods of time, creating what amount to forced loans from importers to the state.
  • Setting up the website to accept just a handful of new requests a day, holding the line against even greater expansion of the backlog.
  • Getting PDVSA to demands payment for oil sooner, and to sell on future’s markets, literally selling oil before it’s pumped it out of the ground, to try to squeeze some extra cash out of the cash cow.
  • Issuing crazed amounts of “Notas Estructuradas” – dollar denominated domestic debt sold for bolivars - to try to relieve the pressure from the parallel market.
  • Holding up tens of thousands of new, imported cars up for weeks at a time in Puerto Cabello as Cadivi checks whether they meet new regulations.
And, no doubt, a thousand other gimmicks that you can bet are out there, but we're not hearing about. One could only wish the government would devote the kind of ingenuity it shows for concocting accounting smoke-screens to solving the country's actual problems.

None of these tricks really addresses the underlying non-viability of Misión Cadivi, none of them alters the ultimate inevitability of devaluation, but each of them puts off the day of reckoning for that little bit longer.

And then, of course, there’s the political economy of all this lunacy. Because each of these gimmicks creates a new rent-seeking opportunity and spawns its own little ecosystem of parasitic intermediaries and financiers with more connections than scruples who long ago figured out how to monetize Chávez’s economic illiteracy. Each new patch stuck on the Cadivi money hole corrupts our society just that little bit more and helps transfer wealth from the socialist state to those who need it least, deepening the trends towards inequality the government daily swears to be combating.

And all for the sake of adding just a few weeks or months of life to a policy that isn’t even viable in the medium term, much less in the long term, and that will necessarily, self-evidently collapse…carrying with it a hugely destructive new wave of financial instability, corporate failures and heightened inflation that’s as sadly predictable today as it was in ahead of Viernes Negro in 1982, of the collapse of Recadi in 1989, of the Caldera controls in 1996 and of every other experience with the macroeconomics of populism Latin America has ever seen.

...just some thoughts to keep you entertained (and motivated) as you down another cup of coffee and keep hitting "refresh" on that %*#^)*^! Cadivi page.